Private sector funding needed to fill infrastructure investment gap

PUBLISHED : Wednesday, 28 June, 2017, 5:00pm
UPDATED : Wednesday, 28 June, 2017, 10:43pm

Years of violent conflict and neglect have devastated Iraq’s power infrastructure. Chronic electricity shortages trigger blackouts, choke economic growth and make everyday life a test for millions of Iraqis and the country’s swelling refugee population. Iraq needs a massive amount of investment to rebuild its energy sector.

The challenge is dramatic, but it’s one that most developing countries face at some level. Public resources aren’t abundant enough to close a yawning infrastructure investment gap. Emerging markets need more than US$1 trillion annually – and private investors are reluctant to step forward.

In Iraq, companies like Mass Global Energy Sulimaniya (MGES) are beginning to show that the private sector can have an impact. Supported by IFC, the company is boosting the capacity of a power plant in Kurdistan that will bring power to 3 million people. It is also building a new plant that will supply half of Baghdad’s electricity needs.

World Bank group sees Hong Kong playing key role in emerging market infrastructure financing

Investors, governments and development institutions need new ways to link private funds – especially the more than US$70 trillion held by pension funds and insurance companies – with infrastructure investments that can make a difference. Like MGES. Currently, large institutional investors allocate less than 1 per cent of their assets to infrastructure debt. That can – and must – change.

This week Eastspring Investments, the Asian asset management business of Prudential, agreed to channel more than US$500 million through a new programme that mobilises funds from institutional investors for much-needed infrastructure projects in emerging markets. The programme, MCPP Infrastructure, allows insurance companies to participate in IFC’s future portfolio of infrastructure loans. It is on track to raise US$5 billion by 2021.

The concept has proven successful and already yielded results for public institutions. The original MCPP platform, launched in 2013 with China’s State Administration for Foreign Exchange (SAFE) as the anchor investor, established a structure that could be replicated with other institutional investors. Since then, the entire MCPP programme pledge has been fully allocated and a total of US$1.84 billion has been committed in 53 projects.

With their long time frames and predictable cash flows, infrastructure investments are a good fit for pension funds and insurance companies

The MCPP Infrastructure platform expands that co-investing platform to mobilise long-term private capital.

With their long time frames and predictable cash flows, infrastructure investments are a good fit for pension funds and insurance companies. Many like Eastspring and Allianz, another early participant in MCPP Infrastructure, have deep experience in infrastructure investment in larger emerging markets. But many more have typically been hesitant to invest across all the many countries that desperately require private infrastructure finance. Too often, their stringent risk criteria simply don’t allow it, they lack expertise and loan-origination ability, or investing in developing markets isn’t cost effective. MCPP Infrastructure was designed to address those concerns.

To match the risk appetite of private institutional investors, the programme provides credit enhancement in the form of a first-loss tranche. That setup enables every US$1 invested to mobilise an additional US$8 to US$10 from third parties. The platform also allows institutional investors to leverage IFC’s ability to originate and manage a portfolio of bankable projects, deals that may have previously been outside their comfort zone.

n Asia alone, the needs are staggering. The Asian Development Bank estimates that developing Asia and the Pacific will need more than US$26 trillion in investment in infrastructure and climate change mitigation and adaptation over the next 13 years. More than half of that amount – US$15 trillion – is needed just for power.

The public sector historically has shouldered the burden of the region’s infrastructure investment – more than 90 per cent. That too needs to change. Hong Kong, which is one of the world’s major financial centres and home to many institutional investors, understands this, and is doing its part to bring the private sector to the table. A year ago, the Hong Kong Monetary Authority opened the Infrastructure Financing Facilitation Office (IFFO), an initiative designed to help match finance with worthy projects.

IFFO is a step in the right direction. Yet at a time when more than 1 billion people around the world live without electricity and around 1 billion don’t have access to an all-weather road, so much more can be done to close the financing gap.

Getting there will require innovation and partnership. Eastspring Investments, the HKMA and IFC are showing that it can be done – by helping create a new asset class for emerging markets infrastructure and bringing essential services where they are needed most. Institutional investors should take note.

Hua Jingdong is vice-president and treasurer of International Finance Corp, a member of the World Bank Group